Zimbabwe defaults; US raises debt ceiling limit

In moves that should have surprised no one, last week Zimbabwe defaulted on debt repayments and the United States raised its debt ceiling limit to avoid defaulting.

Zimbabwe owed Caledonia Mining a mere $3 million. Because the debt was in US dollars and could not be printed (at least not by the Zimbabwean central bank), Zimbabwe could not pay.

Had the debt been in Zimbabwean dollars, the Reserve Band of Zimbabwe (RBZ) could have printed more worthless Zim dollars and given them to Caledonia Mining. Instead, the RBZ simply told Caledonia , “We’ll pay you later.” Good luck with that, Caledonia.

Meanwhile, the US owes about $12.3 trillion, a number that is increasing daily by about $3.83 billion. If the Senate had not voted to raise the debt ceiling limit, the US would default in a few months. There is a big difference, however, between Zimbabwe and the United States.

Zimbabwe is a socialist basket case, which was the jewel of Africa when it was known as Rhodesia. Its currency has not enjoyed acceptance outside Zimbabwe in decades. No one wants Zim dollars, not foreigners, not Zimbabweans. The more Zim dollars they print, the higher the rate of inflation, which hit a monthly rate of 79.6 billion percent in late 2008. One index put Zimbabwe’s rate of inflation at 89.7 sextillion percent. (Frankly, I don’t believe any degree of accuracy can be relied upon when calculations result in such numbers. Basically, the RBZ has inflicted hyperinflation upon Zimbabwe.)

The United States, while not yet a basket case, is, nonetheless, on the road to socialism, and its currency is being inflated just like the Zim dollar, albeit at not the same rate. And, at this time, the dollar is the world’s primary reserve currency. In not too recent time, the dollar was the world’s only reserve currency, but those days are gone. Massive government spending on domestic programs and the costs of undeclared wars resulted in deficit spending and gargantuan debt that knocked the dollar from its lofty perch.

While I am not ready to predict a fall for the US dollar as precipitous as the one suffered by the Zim dollar, our politicians and “leaders” have embraced socialism, a forced economic system that destroys the incentive to produce. When the private sector ceases producing desirable goods, the nation’s currency become less desirable .

It is evident to anyone with eyes open that governments are not capable of producing the goods that people want. In Zimbabwe, next to nothing is produced, the government having destroyed the private sector. Next to nothing is imported as no one wants Zim dollars. Zimbabweans suffer.

The US dollar remains the world’s primary reserve currency partly because it once was redeemable in gold and because today the US still produces goods wanted by the marketplace. To shoppers, this may seem unbelievable because it is next to impossible to find retail goods not manufactured in China. But, the US remains a major manufacturer in the world despite China having captured the retail sector. All of which means dollars will still buy some things. Another demand for dollars: most oil sales are still priced in dollars.

While the US dollar is not yet set to become a Zim dollar tomorrow, the potential is there. Zimbabwe went completely socialistic in less than three decades, with the government taking over nearly all aspects of economic life. Less than thirty years from prosperity to ruination. But, Zimbabwe is a small nation.

In the US, socialists have been grinding away since the War Between the States, and they made huge strides under Woodrow Wilson with the formation of the Federal Reserve System and the implementation of income tax. So accepted has become socialism that some 40% of the American people seem eager to have the government take over control of health care. And, sadly, General Motors is now known as Government Motors.

Another fifty pages could be used to note the socialistic programs in the US, everything from agriculture and energy to banking and retirement. (Yes, Social Security is a socialistic program.) Most readers are well aware of the trend toward socialism in the US. The point is that as socialism grows, the productive sector weakens as government destroys the incentive to employ capital and take risks. As our ability to produce goods dies, the dollar will die also. For foreigners—and Americans for that matter—to want to hold dollars, there must be products consumers want. F.A. Hayek, who was awarded the 1974 Nobel Prize in Economic Science (back when the Nobel Prize meant something), called socialism The Road to Serfdom.

To solve today’s economic woes, (at least that is what they think they’re doing) politicians simply raised the debt ceiling so that the Treasury can sell more debt to fund make-work programs and our war efforts. The big buyer of US debt today is the Fed. And, where does the Fed get the dollars with which it buys US debt? The Fed creates them out of thin air. If the Fed creates too many dollars, the dollar will go the way of the Zim dollar. But when?

I know of no one who claims to know the answer to that question, but insomuch as the socialists have been pounding away for 150 years, the dollar could, from this point, go down in less time than it took for the Zim dollar to become worthless.

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